This document summarizes remedies available to minority shareholders for wrongs committed against them or the company by majority/controlling shareholders under Nigerian law. It discusses exceptions to the general rule that only a company can sue for wrongs against it, including where acts are illegal, procedures are improper, or shareholders' individual rights are infringed. It provides examples of cases where minority shareholders were permitted to sue. The document also outlines types of actions minority shareholders can commence, including personal, representative, and derivative actions, with derivative actions requiring court approval.
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REMEDIES AVAILABLE TO MINORITY SHAREHOLDERS FOR WRONG
DONE TO THE SHAREHOLDERS AND THE COMPANY BY THE
MAJORITY/CONTROLLING SHAREHOLDERS
It is rather easy for the rights of minority shareholders to be infringed upon however minority
shareholders are afforded some protection under the Companies and Allied Matters Act
(CAMA) to protect their rights/interests.
While it is trite in line with the provisions of Section 299 of CAMA1, that where a wrong has
been done in the course of a company's affairs to the company (by the majority or the alter ego
of the company), only the company can sue to remedy the wrong. This is commonly known as
the rule in Foss .v. Harbottle. There are some exceptions to this general principle provided for
under Section 300 of CAMA. These exceptional instances are discussed hereafter.
A) Entering into any transaction which is illegal or ultra vires2:
In the case of Yalaju-Amaye v Associated Registered Engineering Co Ltd (AREC)2, a
minority shareholder was allowed to sue where the purported appointment of new
directors by the board was held ultra vires the board as there was no such power granted in
the articles of association.
B) Purporting to do by ordinary resolution any act which by the Company’s Articles or the
CAMA is required to be done by special resolution3:
The law guards against the risk of majority/controlling shareholders ratifying an act which
is in itself wrong, by a wrong procedure. For minority shareholders to effectively bring an
action under this exception, it must be clearly established that irregular and illegitimate
procedures were adopted by the majority and this requires a good knowledge of the
provisions of the company’s articles as well as the provisions of CAMA.
1
CAP C20 LFN 2004
2
(1986) 3 NWLR (pt 31) 653
3
S. 300(b) CAMA
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C) Any act or omission affecting the Minority Shareholders’ individual rights as members of
the Company:
This occurs where the shareholders membership rights are the facts in issue, for instance where
minority shareholders are systematically denied the right to vote at general meetings, or
consistently denied the right to receive notice of general meetings of a company. In the case
of Edokpolo & Company Ltd v Sam-Edo Wire Industries Ltd4, a minority shareholder
holding 40% of the company’s shares, alleged collusion between the company’s Chairman
and Solicitor, the result of which was the allotment of shares to other parties out of the 40%
belonging to the minority shareholder. The Supreme Court held that the minority
shareholder was entitled to sue in its personal capacity to protect its personal right to the
shares held by it. In the words of Aniagolu, J.S.C; “it appears to one that this is a clear case
in which a minority shareholder should, in the interest of justice, be allowed to sue as one
of the exceptions to the rule in Foss v. Harbottle”.
D) Committing fraud on either the company or the minority shareholders where the
directors fail to take appropriate action to redress the wrong done5:
Examples of this is where there is expropriation of the company’s property by
majority shareholders or where majority shareholders have obtained certain unfair
advantages by dealing with the company’s property, or an attempt to release the
directors’ from liability arising from breach of the duty of good faith owed to the
company. In the case of Yalaju-Amaye v AREC6
, the minority shareholders were
allowed to sue where the directors of the company went on a withdrawal spree from
the bank account of the company, falsified minutes of meetings to cover up a non-
existence board resolution to change the signatories to the company account on the
ground that a fraud had been committed against the company. A broader definition
4
(1989) 4 NWLR (Pt. 116) 473
5
S 300(d) CAMA
6
Supra
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of fraud was given by the Supreme Court in this case as “Any act which may amount
to an infraction of fair dealing, or abuse of confidence or unconscionable conduct, or abuse
of power as between a trustee and his shareholders in the management of a company.”
In light of the above definition, “fraud’’ is used in a loose, wider and equitable sense
thus an abuse or misuse of power and indeed breach of duty on the part of the
majority shareholders or controlling directors opens the way for minority
shareholders to sue to correct the wrong done to the Company.
What may be imputed as fraud on the company or on the minority shareholders varies from
case to case, and the entire circumstances surrounding a particular case would usually be
examined to determine whether or not it meets the requirements. In the case of Omisade v
Akande7, the parties involved in the suit were both directors and shareholders and had
shares in equal proportions in the company. In a contract entered into between the company
and a US-based airline, it was agreed that in consideration for patronage of the flight
services of the airline by Muslim pilgrims through facilitation by the company, the airline
would pay a certain amount of money as commission to the company. Omisade alleged that
Akande falsely represented to the US-based airline, with which the company had a contract;
that the company was being wound up, in order to divert the commission due to the
company to another establishment in which Akande was the majority shareholder. It was
held that Akande had clearly committed a breach of his fiduciary duty as a director of the
company by making false representations about the company in order to divert profit from
it, and that this amounted to a fraud on the company for which a minority shareholder, or
any other interested shareholder could bring an action on behalf of the company.
7
(1987) 2 NWLR (pt 55) at 158; (1987) 18 NSCC 486
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E) Where a company meeting cannot be called in time to be of practical use in redressing a
wrong done to the company or to minority shareholders8:
This situation may arise where an irreversible wrong is about to be done and the facilities
for convening a proper meeting of shareholders or the board are not available, or where
urgent action is required to abate the wrong. It will be unreasonable to wait for a formal
meeting requiring notice to be convened to address the wrong thus the law allows a
shareholder in this instance to apply to court to abort or nip the wrong in the bud.
F) Where the directors are likely to derive a profit or benefit, or have profited or benefited
from their negligence or from their breach of duty9:
In this circumstance, a shareholder/member10 of the company may apply to court for
redress. The rationale behind this is that the directors are the wrongdoers and are also the
ones in charge of the day to day running of the company, it is to be expected that they
would not take any action against themselves for breach of their duty.
G) Where the interest of justice demands:
In its effort to apply equitable principles to corporate relationship for the purpose of
minority shareholders protection, the Nigerian Supreme Court, in Edokpolor & Co Ltd v
Sam-Edo Wire Industries Ltd recognised a further exception to the rule in Foss v Harbottle
now known as the “interest of justice” exception. This principle is to the effect that where,
considering all the circumstances of a case, it is in the interest of justice that the application
of the rule in Foss v Harbottle be suspended, the court has a duty to suspend application of
the rule even where the circumstances of the case do not fall under any of the preceding six
categories of exceptions.
8
S 300(e) CAMA
9
S 300 (f) CAMA
10
According to S. 302 CAMA, “member” includes the personal representative of a deceased member and any
person to whom shares have been transferred or transmitted by operation of law.
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Types of Action that can be commenced by Minority Shareholders
In line with the exceptions to the rule in Foss .v. Harbottle, there are 3 types of actions that
Minority shareholder(s) can bring:
1. PersonalAction
A personal action may be commenced by a member to enforce a right due to him personally
where such rights have been abused by an act deemed to be the act of the company11 See
Section 301 of CAMA. An example of personal action is where a shareholder commences an
action to enforce the term of a contractual obligation with the company.
2. RepresentativeAction
A representative action is commenced where an individual member’s right has been
infringed, and the infringement affects other members in the company, the appropriate
action will be a representative action i.e. a member will be suing the company on behalf of
himself and other aggrieved members. See Section 301 (2) of CAMA.
3. DerivativeAction
A derivative action is when minority members/shareholders bring an action in the name of
the company to correct the wrong done to a company by majority/controlling shareholders.
There are however various impediments to the minority shareholder’s ability to enforce
company’s rights as the minority shareholder(s) has to satisfy the provision of Section 303
of CAMA, which provides that:
1) “Subject to the provisions of subsection (2) of this section, an applicant may apply to
the court for leave to bring an action in the name or on behalf of a company or to
intervene in an action to which the company is a party, for the purpose of presenting,
defending or discontinuing the action on behalf of the company.
11
S. 301 CAMA
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2) No action may be brought and no intervention may be made under subsection (1) of this
section unless the court is satisfied that:
a. The wrongdoers are the directors who are in control and will not take necessary
action.
b. The applicant has given reasonable notice to the directors of the company of his
intention to apply to the court under subsection (1) of this section if the directors of
the company do not bring, diligently prosecute or defend or discontinue the action.
In light of the foregoing provision, minority shareholders before they can validly commence a
derivative action must first apply to the Court for leave to commence the action and where
they are unable to establish factually and based on the provision of CAMA that the conditions
for a derivative action has been met, the court will refuse leave.